Larissa has been talking with the companies directors about the future of east coast yachts. To this point, the company has used outside suppliers for various key component of the companies yachts, including engines. Larissa has decided that East Coast yachts should consider the purchase of an engine manufacturer to allow east coast yachts to better integrate it supply chain and get more control over engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan engines, Inc., is a possibility. She has asked Dan Irvine to analyze Ragan's values.

Ragan Engines, Inc., was founded nine years ago by a brother and sister-- Carrington and Genevieve Ragan-- and has remained a privately owned company. The company manufactures marine engine for a variety of applications. Ragan has experienced rapid growth because of a proprietary Technology that increases the fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned by Carrington in Genevieve. The original agreement between the siblings gave each 125,000 shares of stock.

Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered the following information about some of her Ragan's competitors that are publicly traded; (chart shown in picture).

Nautilus Marine Engines' negative earnings per share (EPS) was the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $1.75. Last year, Ragan had an EPS of $4.10 and paid a dividend to Carrington and Genevieve of $215,000 each. The company also had a return on equity of 18 percent. Larissa tells Dan that a required return for Ragan of 13 percent is appropriate.

1. Assuming the company continues its current growth rate, what is the value per share of the company stock?

2. Dan has examined the company's financial statements, as well as examining those of its competitors. Although Ragan currently has a technology advantage, Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantages only last for the next five years. After that period, The company's growth will likely slow to the industry average. Additionally, Dan believes that the required return for the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock price?

3. What is the industry average price earnings ratio oh? What is Ragan's price earnings ratio? Comment on any differences and explain why they may exist.

4. Assume the company's growth rate slows to the industry average in five years. What future return on equity does this imply?

5. Carrington and Genevieve are not sure if they should sell the company. If they do not sell the company out right to east coast yachts, they would like to try and increase the value of the company stock. In this case, they want to retain control of the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. What steps can they take to try and increase the price of the stock? Are there any conditions under which the strategy would not increase the stock price?